Disinflation is a very unreliable boyfriend

I have been making mutterings here for some years now about our expectations that inflation will make a comeback in the West.

We’ve seen it in asset prices for ages, of course. But we have also long been convinced that the final consequence of today’s ludicrously loose monetary policy will be much higher inflation than most people now expect. That might now be beginning to happen.

Look to the US. It is, as Edouard Carmignac of asset manager Carmignac Gestion points out in the FT this week, “experiencing its weakest post-recession recovery in any of the 11 cycles since the Second World War”. And that’s despite near zero interest rates and a four-fold expansion in the size of the Federal Reserve’s balance sheet (thanks to QE).

With that background in mind, says Carmignac, “the incipient rise in US consumer price inflation is a cause for serious concern”. Incomes have barely budged in years, but the price rises are hitting a “broad range of non discretionary goods”; think motor insurance and toddler clothes.

The key point here is a frightening one: prices aren’t rising as a result of buoyant consumer demand, they are rising because “companies are charging more for goods with inelastic demand in an attempt to offset low sales volumes”. Something to keep an eye on.

All is not necessarily well in the UK either. Most economists now worry about deflation more than inflation, and assume that inflation is, at the very least, as Halkin’s Peter Warburton puts it, “on a glide path” to 1%.

Yet the RPI, which we used to measure inflation for official purposes until quite recently, is showing 2.6%, and the CPI has just made a surprise (for most) jump from 1.6% to 1.9%. Disinflation, says Warburton, can be “an unreliable boyfriend” in a low interest rate environment.

Here’s a few reasons why we don’t have much money to spend any more. When I started work in the 80’s I worked for an ex-governemt utility with 370,00 employees in the UK. My starting wage when I started work was enough to buy a one bed flat for myself on 3 times earnings. With hard work and progression you could earn enough to buy a small house and support a family.

Now that same company has around 80,000 employees, most of whom are in India…and still trying to off-shore more. This is one of many UK companies including banking, insurance, utilities etc that have off-shored mass UK blue collar work that used to pay an average wage that would support a family.

Now that mass ‘blue collar’ employment has mostly gone, what appears to be left in the UK is lower paid manual work (minimum wage stuff) and self employment which earns the government less in income tax. There’s still the ‘professions’ for degree level candidates, but I suspect they’re the minority of UK employment. Companies fill much of the low paid work with immigrants, so there’s no pressure on increasing wages and prices for the right reasons…to improve quality of life.

The same company used to pay 2 years wage in redundancy payment, which was tax free. My ex-colleagues used that to buy/start a business and remain independant of the state. Now the payment is 9 months wage and the government taxes anything over £30k which is not enough to buy a business.

Then anyone who’s ‘got money’ has invested in property and sent the prices to ridiculous levels during a period of low interest rates (another disaster waiting to happen), which further reduces spending power. Also a lack of CGT rollover on 2nd homes sales means landlords hold onto ‘first time buyer’ type property thus restricting supply and increasing prices further.

My main concern here is that people don’t have enough money to spend to keep the economy growing. We are earning less and are taxed too much at source. This then reduces high-street transactions, which reduces profits so companies off-shore to keep their prices down, which leads to less employment and even less spending power, and less tax revenue for the government. So the government look at what else they can tax…inheritance, your house, your savings etc which in turn further reduces your spending power and increases dependance on the state. Meanwhile high earners are forced off-shore because of higher % tax rates, so the govenment lose what revenue they would have had from them, and anyone who is lucky enough to be a director can pay themselves in dividends at a lower rate.

It’s a pretty toxic mix. I think some of the answers are flatter, lower rate tax on all income; european-style works council to protect UK jobs; fixing residential mortgages at 5% for life (and only 3 times earnings)…then the government should let market forces take control and stand back.

Clive

Vince

“european-style works council to protect UK jobs”

As I work in the UK for a US company, I’d have trouble agreeing to that. If we protect “our” jobs, other countries will protect “their” jobs and a lot of us will be on the dole.

Vince

It makes sense to protect “our jobs” in any economy though. For an economy to work properly the inhabitants of a country need to be able to trade goods and services on a fairly level basis (including wages), and profits taxed for the country’s government to provide social services. When your own people get cut out of the money-go-round through cheap imported labour or cheap raw materials you put people out of work, the tax revenue goes overseas and you increase the drain on social services.

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